ASUNCIÓN, Paraguay – International credit rating agency Fix SCR recently issued a report warning that Paraguay's banking system could face significant challenges in efficiency and increased competition amid ongoing changes and a process of concentration. According to the report, titled "Paraguayan Financial System: Developments, Recent Situation, and Outlook for 2025," while more active movement is expected in the loan and deposit sectors, banks will simultaneously be under pressure to improve operational efficiency and secure a competitive edge amidst deepening market concentration.

Fix SCR recalled major interbank mergers and acquisitions that took place in 2024, citing the absorption of Ueno Bank by Visión Banco and the ongoing merger process between Banco Atlas and Banco Familiar.

Adding to this, with Finexpar's conversion to Zeta Banco, the banking sector now accounts for 98.1% of the total assets of the financial system, an increase from 96.8% at the end of 2023.

"The possibility of new acquisitions or mergers to create economies of scale cannot be ruled out," the report noted, as medium-sized banks face increasing price competition due to the strengthened market dominance of larger banks. The fact that the top three banks accounted for 48.8% of the system's total loans at the end of 2024 clearly demonstrates this market concentration.

In this context, the commencement of negotiations by Banco Continental, the current market leader in terms of assets and deposits, to acquire Banco Río is a noteworthy development.

"We understand that other financial companies are also applying for banking licenses, which suggests that this process of interbank consolidation will continue," Fix SCR stated, indicating the potential for further structural reorganization of the Paraguayan financial market.

The report also emphasized that "the banking system faces the challenge of continuously improving efficiency indicators in an environment of intense competition and increasing margin pressure." This implies that banks need to strive for substantial growth beyond simply increasing their size.

In conclusion, Fix SCR anticipates that Paraguay's banking system will continue to experience steady growth in the loan and deposit sectors, supported by sound solvency and liquidity indicators, and favorable asset quality, within a positive scenario of economic activity and employment growth. However, it added that ensuring efficiency and adapting flexibly to market changes in an increasingly competitive environment will be a key challenge for the sustainable growth of Paraguay's banking system.

Characteristics of Paraguay's Banking System: Paraguay's banking system is characterized by a relatively small number of large banks dominating the market, with a changing competitive landscape due to digital transformation and the growth of fintech in recent years. Impact of Market Concentration: While mergers and acquisitions between banks can bring short-term benefits such as increased efficiency and cost reduction, there are also concerns about potential long-term negative effects such as reduced competition and decreased accessibility to financial services. Importance of Efficiency Improvement: Amidst intensifying competition and margin pressure, Paraguayan banks must enhance efficiency through various measures such as reducing operating costs, expanding digital channels, and providing customized customer services to achieve sustainable growth. Role of Regulatory Authorities: It is crucial for the Central Bank of Paraguay and financial supervisory authorities to establish and implement balanced regulatory policies that maintain the stability of the banking system while fostering a fair competitive environment and strengthening consumer protection. This report from Fix SCR clearly presents the realistic challenges faced by Paraguay's banking system and offers significant implications for the future development of the Paraguayan financial market.